Why Read Adam Smith?

January 6, 2016
By ISI Archive

To read Adam Smith is to be almost overwhelmed with the conviction that you have wasted your life. Smith is difficult, but he is not difficult because he is opaque or imprecise, as is the case with so many academic scribblers past and present. He is difficult because he is profound, in every sentence and with every word. Smith is worth wrestling with, and it is to our great loss that he doesn’t assume a prominent place in the core curriculum at every institution of higher learning.

In the public mind Smith is associated with business, capitalism, and “conservative” economics. Smith was no conservative, and he was no friend of the businessman. Thomas Sowell noted that you don’t spend ten years writing a nine-hundred-page book to say how satisfied you are with the status quo. You only do that if something is bugging you. In the commercial sphere, the principles conservatives seek to “conserve” are, in fact, quite radical: the idea that we have by right the liberty and dignity to buy low and sell high—and most important, to say “no thank you” to someone’s offer—was and is quite radical. And as our history demonstrates, we still haven’t quite got it right. Smith had no patience for special pleading, and he was wary of the motives of businesspeople, noting that they don’t gather even for amusement before the conversation turns into a conspiracy against the public.

Smith understood, more than two centuries before James Buchanan won the Nobel Prize for developing the field, some of the basic tenets of public choice theory. He argued that we should be deeply skeptical of calls from merchants and traders to protect or regulate their businesses in the name of the public interest, for it was quite remarkable how frequently the “public interest” lined up precisely with the private interest of a party seeking special privileges.

You have probably heard this argument: “economics is to be discarded because it assumes people are rational, and we know from experience that people are anything but.” First, this mistakes a modeling convention for a description of our actual mental processes; as the economist David Skarbek put it on Twitter, “Rational Choice Theory is not a theory of cognition.” Smith knew this, and his entire intellectual program was based on the actions of people as he observed him, not men as he imagined they could be. We seek to make ourselves better off however we choose to define that, and this broad conception of self-interest is, I think, what Smith had in mind.

It is a mistake, too, to think of Smith as an apologist for untrammeled greed. He emphasized the power and importance of self-interest not as an apologetic for ill-mannered egoism but because of what he observed about social processes like markets and politics. His was a theory of order, and a theory that would later receive its most full-throated defense in Hayek’s discussion of knowledge-generating processes of conversation and exchange that create undersigned and spontaneous order.

“Opulence” Proceeds from “Natural Liberty”

The Source of Prosperity, according to Smith, was the Division of Labor. Specialization and division of labor made us more productive by increasing our dexterity in our chosen task, by saving the time we would otherwise spend switching from task to task, and by building up familiarity with a task to the point that it led to labor-saving innovation. The division of labor was in turn limited by the extent of the market. The larger our range of potential collaborators—and I use that word intentionally, as markets are collaborative spaces—the greater our ability to divide labor, specialize, and be more productive.

Smith argued that the natural progress of opulence—the title of one of his chapters in the Wealth of Nations (WN)—was a product of division of labor and of the liberty we have to buy and sell. I was struck by this notion of natural progress, and it occurs to me that a study of Smith’s use of natural could yield insight into the fundamental principles of the classical liberal tradition. Here he is in The Wealth of Nations:

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.

When we are free to buy and sell, or to build better mousetraps, we get richer. First, we get richer by moving goods from lower-value to higher-value uses. This happens without actually creating any new material goods. An Alabama fan with an Auburn ticket and an Auburn fan with an Alabama ticket can both be made better off by swapping. They don’t create any new tickets or any new football, but the tickets move from those who don’t value them very highly to those who do.

Second, as Smith points out, we get richer because of the division of labor. As Ludwig von Mises and Friedrich Hayek would show in the twentieth century, it is impossible for a socialist society—one in which the government owns the means of production—to operate as a complex division-of-labor economy, because the absence of markets for the means of production short-circuits the information-generating process that allows us to measure costs accurately. Without prices, we cannot measure the gaps between the value of what is produced and what is consumed in production. Furthermore, without exchange we don’t get as a by-product the information about what it will take to harness and deploy others’ knowledge. As Hayek would argue, competition is a discovery process, and as James Buchanan would later argue, order is defined in the process of its emergence. I believe with Steven Landsburg that the universe is a fundamentally mathematical object, but there is no set of discoverable equations governing social reality the way there is a set of discoverable equations governing physical reality. This is not to say there aren’t rules: consider the law of demand and the law of comparative advantage. These, though, are broad insights about general tendencies, not functional forms into which phenomena can be squeezed and thereby manipulated. The social world, like the economy, can be understood. It cannot be planned.

Prosperity Cannot Be Planned

Here now I wish to introduce you to two characters in Smith through a few quotes. The Man of System (from The Theory of Moral Sentiments) and The Statesman (from WN) are pictures of Smith’s conviction that trying to control the lives of others is the height of presumption and folly. First, The Man of System:

The man of system . . . seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.

And now The Statesman (forgive me for this very long passage):

The produce of industry is what it adds to the subject or materials upon which it is employed. In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods. … But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the publick good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. …

What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

The Man of System and The Statesman are powerful because of special interests, but that’s not all. They are also powerful because of our ideas about how a society should be organized. This is true for mundane evils like transportation monopolies and business licensing. It’s hard to beat City Hall, because a lot of people believe in City Hall and conflate “the rule of law” with “the rule of regulators and legislators” (John Cochrane has written an excellent essay on this). It’s true, too, for greater evils, some deliberate like segregation and others merely possessing negative unintended consequences, like minimum wages. It’s also true for great evils like communism and fascism. These ideologies swept over large parts of the world not over the objections of the people but to their thunderous applause.

Liberty and Adam Smith in the Great Conversation

Recent events show us that ideas matter, to quote the title of Richard Weaver’s classic Ideas Have Consequences. The ideas we encounter and process—those that become a part of our being—create the lenses through which we see and interpret events like the protests at Yale and the University of Missouri, the Paris terrorist attacks, and so on. Who are we? What does it mean to be human? What is a life rightly lived? What does it mean to flourish? These are the kinds of questions you get to ask in the academy. More than this, you get to ask historical and social scientific questions. Under what institutional conditions do individuals and societies flourish? What is justice? What, historically, has attenuated flourishing, and what if anything can we or should we do for members of historically marginalized groups? How can we get beyond visceral, emotional, or aesthetic reactions and truly understand what is going on?

Ideas have consequences, literally for better or for worse. Historically, liberty has not been the norm. In just the last century or so, people who should presumably know better have at various times and in various places embraced total war, genocide, eugenics, and gulags. Intellectuals have embraced ideas—nationalism, socialism, and national socialism—that combined with modern technology created industrial-strength killing machines that almost drowned civilization in blood. This is the legacy we inherit. What legacy will we leave for those who come after us?

During a visit to Samford University, the theologian Stanley Hauerwas pointed out that college students have four years to read great books, and asked, “Why waste it on not learning how to read?” Why indeed? Maybe it seems pointless or impractical, and I’ll be the first to admit Smith is difficult. Tolstoy—I’m a little over halfway through War and Peace as of this writing—is difficult. We read them in spite of their difficulty because they make us grapple with ideas that transcend time and space.

The philosopher Arthur F. Holmes in his book The Idea of a Christian College points to the question we’re all asking when tasked with something difficult that doesn’t seem very practical: “What am I going to do with this?” He notes that we are asking the wrong question. Instead, we should be asking, “What will these ideas do to me? What kind of person am I becoming because I am encountering these ideas?” In reading Smith, you become a person who better understands our moral sentiments and the nature and causes of the wealth of nations. I don’t say that lightly: you gain a better and clearer understanding of how the world works, and should work. You gain, in short, an appreciation for the conditions—embodied in “the obvious and simple system of natural liberty”—that have made us not only richer but also more humane.

Art Carden is Associate Professor of Economics at Samford University’s Brock School of Business. His research has appeared in the Journal of Urban Economics, the Southern Economic Journal, Applied Economics, Public Choice, and Contemporary Economic Policy, and his commentaries have appeared in Forbes, USA Today, and many other outlets. He earned a BS and MA from the University of Alabama, and an AM and PhD from Washington University in Saint Louis. Follow him on Twitter at @artcarden.

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